4/27/2010 @ 6:00AM

Energy Companies' New Strategy

When China became a net importer of oil in 1993, its national oil companies embarked on a massive program of investment in overseas oil resources. As the country now imports gas as well, these companies also invest in international gas projects. By early 2010, after 18 years of investment, Chinese NOCs have a stake in more than 200 projects in about 50 countries. The total value of these projects is estimated to exceed $50 billion.

This overseas investment has been driven by two sets of interests for China:

–Its companies are seeking to increase their oil and gas reserves and thus secure their future commercial viability.

–Beijing wants to enhance China’s security of oil and gas supply and to promote the internationalisation of major national companies; it also has diplomatic goals.

Recent developments. Mid-2009 saw a dramatic change from the pattern of not collaborating extensively with international oil companies (IOCs) outside China:

1. Iraq. The first formal bidding round for fields in southern Iraq saw China National Petroleum Company (CNPC) in partnership with BP win rights to develop the South Rumaila oil field, which holds about 17 billion barrels of oil-in-place and should yield about 1 million barrels per day. In the second round, end 2009, CNPC signed an agreement to develop the 4 billion barrel Halfayah field in collaboration with Total, Petronas and Iraq’s South Oil Company.

2. Canada. Pursuing oil reserves further afield, PetroChina received approval from the Canadian government at the end of 2009 to purchase 60% of two oil-sand projects in Alberta, owned by the Athabasca Oil Sands Corporation. This month saw confirmation of Sinopec’s over $4.6 billion purchase of ConocoPhillip’s 9% stake in Syncrude Canada.

3. Latin America. CNOOC announced in March that it planned to buy a 50% share of Argentina’s Bridas, which has assets in Argentina, Bolivia and Chile. This acquisition brings CNOOC alongside BP, for Bridas also owns 40% of Pan American Energy and BP the other 60%.

Driving forces. The main driving forces behind this new pattern of behavior seem to be two-fold:

1. Energy access. China’s government and its NOCs want to gain access to what are thought to be some of the world’s last remaining large oil accumulations. Iraq is an obvious target. CNPC signed a contract as sole operator in the Al-Ahdab oil field in 2008, regaining rights it first acquired in 1997. For technical and political reasons it was unlikely to be able to gain a 100% share of further fields in Iraq, and so partnering with IOCs was a sensible strategy to ensure a favorable outcome from the first two formal licensing rounds in Iraq.

2. Energy mix. Relatively recently China’s government decided to enhance its push to raise the contribution of natural gas in the country’s fuel mix. Annual domestic production of natural gas has risen from 25 billion cubic metres (bcm) in 2000 to almost 85 bcm in 2009. Yet, even with imports of 7 bcm, gas accounts for less than 4% of total commercial primary energy consumption. Within China, greater efforts are being made to exploit all forms of natural gas. However, few of the countrys reserves are easy to exploit; most require the latest technologies to maximise recovery and ensure commercial viability. Technologies and the skills to use them lie mainly with Western companies. The recent increase in collaboration between Chinese NOCs and IOCs in the field of gas exploitation and import is part of this wider national strategy.

Changed behavior. In a marked change of behavior, the last 10 months have seen decisive moves by China’s NOCs to join with IOCs in major projects and to engage in wider collaboration both overseas and within China.

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